What is an Appraisal?
A real estate appraisal can only be done by a licensed appraiser. The appraiser will look at recent properties that are comparable to yours and through a specific method will come up with an “Appraised Value” of your property.
Appraisals are used for many things…
The most common use of appraisals is by banks who are offering home loans. In this case, the borrower (aka someone buying or refinancing their loan) pays for the appraisal.
- In the case of a home purchase, the appraiser is given a copy of the contract. Hopefully the appraiser sees their job is to look at recent comps and support the value of the sales contract. Occasionally, we run into appraisers who have decided they have another agenda, but generally this works well. Because of this, it is CRITICAL that the appraiser gets a copy of the sales contract and that the copy is accurate. I once had an appraiser get a copy of an offer rather than the ratified contract and it caused complete turmoil when the appraisal came in at the offer price.
- If it is for a refinance, the borrower will generally meet the appraiser when the appraiser comes to the house. I recommend handling that meeting just like a sellers agent should in a real estate contract. I will refer you to those tips later.
In these cases the most critical thing to understand is the POINT of the appraisal. Banks are offering loans which are based on a percentage of either the sales price or the appraised value, whichever is lower. They may be offering a “100%” loan, or an FHA which is 96.5%, or a conventional loan which is 80%…. the important thing is to understand not just the percent but OF WHAT. The OF WHAT is either sales price of appraised value, whichever is lower.
Appraisals for other situations:
- Even in cash buy situations, a buyer may decide to get an appraisal, just to make sure they are paying a reasonable price. Personally, I wouldn’t, but one might. I would recommend reviewing the comps carefully and being comfortable in the sales price. But some unique properties may be more challenging – and in those cases it may make sense. It will also make sense if the buyer plans to use the property as leverage for a loan within a short period of time. I stress again that the appraiser should get a copy of the sales contract. Otherwise, they are shooting in the dark and appraisals are extremely subjective, so who knows what the appraised value will be. It is likely to be WAY off.
- A great time to consider an appraisal is when selling to related parties. It’s not uncommon for brothers and sisters to inherit a property and perhaps one wants to keep the property, and “buy out” the other siblings. Or perhaps parents wish to sell their property to their child. And even business partners sell their interest to one partner or the other for a variety of reasons. In these transactions it may be difficult to determine what the “Fair Market Value” of the property is since you’re not offering it to sale in a typical way. It makes sense here to get an appraisal. But if the property is really unique, you may wish to get 2 or 3 appraisals and use the average of them as what you consider “Fair Market Value” in your transaction. That is because appraisals are subjective, and only represent one person’s opinion of the value of the property.
- Before you sell. Some properties are very unique, and even a qualified real estate agent will have trouble advising you on the likely sales price of your property. It might make sense to get an appraisal done in these cases so you are pricing your property “right” when you attempt to sell. In other cases, particularly if there is a divorce, or dissolution of a partnership, where sellers do not get along, it may be a good idea (or even mandated by a judge) to get an appraisal and list the property for sale for the appraised price. I have even had sellers who wished to price high and I suggested that we get an appraisal before determining the listing price, in hopes that they would see that we need to be realistic when pricing a home.